Pricing up power

12 December 2013

Realising that future revenue streams for electricity from new nuclear stations are crucial for developers to make final investment decisions, the UK government introduced a draft bill to Parliament in 2012 that proposed a restructuring of pricing for electricity in the electricity market. This bill, known as Electricity Market Reform (EMR) is due to achieve Royal Assent later in 2013. Key to this reform is the agreement of a Contract for Differences (CfD) whereby the price of electricity is fixed at a ‘strike price’.

In simple terms, utility companies will pay back any excess of the market price over strike price and likewise, receive a payment when market price is below strike price. There are two big advantages to this mechanism. First, the strike price can be fixed for a long period, giving a high degree of certainty for return on investment. Second, consumers can benefit from a stable price of electricity.

However, this certainty and predictability itself comes at a price, and on Monday 21 October 2013 the price deal between EDF and HMG for EDF projects at Hinkley Point and Sizewell was announced at £89.50 per megawatt hour, rising to £92.50 if the Sizewell scheme does not go forward. This price will apply when the new stations start generation early in the 2020s. The current wholesale price for electricity is around £45 per megawatt hour.

Hinkley Point C

How is such a price justified? Proponents will claim that ever increasing demand for ‘greener’ electricity has to be met by a significant baseload generation technology and that nuclear power is the obvious choice. High capital costs are offset by significantly lower costs for operation through the 60-year life of the stations, however the investment risk has to be paid for and this is reflected in the price needed to attract that investment. Opponents will say that uncertainties over ultimate waste disposal from the stations and decommissioning costs add an unacceptable cost burden to the consumer and that greater emphasis should be placed on other forms of renewable energy.

Ultimately, the domestic, industrial and commercial sectors of our economy demand electricity at the press of a button irrespective of whether the sun shines or the wind blows, and given that more than 40 per cent of the UK electricity generating capacity is currently met by coal-fired power stations, we will need to take tough decisions if we want to move to a low-carbon economy, stabilise electricity prices and secure our own supply of energy for the UK.

So, EDF will move forward to a final investment decision at Hinkley Point, Horizon needs Hitachi to take its Advanced Boiling Water Reactor (ABWR) through the GDA process, which could take four years, and NuGen will need to decide on which technology it will deploy at Moorside (Sellafield) before it can even apply for planning permission. All of this means that we will not see a new nuclear power station generating electricity in the UK until sometime in the 2020s. And who will actually construct these stations? Commitments are being made by the developers to support UK manufacturers. However, to what extent? Outside of civil construction, where will the high-value components and fabrications be made?

New nuclear reactor technology for the UK is likely to be French, US or Japanese and so how much of these big infrastructure schemes will truly be ‘Made in Britain’? Well, the Nuclear AMRC will sit at the heart of supply-chain development for the UK civil nuclear industry. Its mission is to help UK manufacturers win work and it will do this through a ‘Sharing in Growth’ programme that will help UK manufacturers increase their competence, capability and cost effectiveness to secure lucrative contracts at home and abroad; and an innovative advanced manufacturing R&D programme at its 8,000m2 state-of-the-art facility on the Advanced Manufacturing Park. With a total investment of £68m over five years, the Nuclear AMRC is destined to play an exciting role in a new era of civil nuclear power for the UK.

Readers' comments
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There is only one thing worse than a state monopoly - a 'private' one.

I can see no downside whatever with not-for-profit autonomous utilities such as Dŵr Cymru (Glas Cymru), "a company especially set up to own DCWW for the public benefit."

'Strike prices' are a direct consequence of neoliberal dogma, and de-risk the investment in the name of the 'free market'. The UK government confesses it doesn't have the competence to commission electricity infrastructure, so it guarantees monopoly status to French and Chinese state industries under the pretence that they'll do it cheaper! You couldn't make it up!

Paying the French and Chinese to build our Nuclear Power Stations is effecitively treason by our own government. We can and do make Nuclear Reactors in this country. Rolls Royce PWR2's in our nuclear submarines can power Swindon according the Royal Navy's own website. The government is Bonkers!

How strange that nobody else has anything to say on this thread. The demise of the UK nuclear industry and the loss of THAT skills base is but ONE example of the monumental market failure brought about by decades of incompetent economic 'governance'.

Arguably the seeds were sown in the '80s, when the Tories fell victim to the resource curse - i.e. the easy money of North Sea oil and gas allowed them to (enthusiastically) decimate manufacturing in favour of 'service' industries.

A core factor in this sorry tale has been our failure to innovate, in both private and public sectors. It is anathema for (short-term) business investment and successive ministers are proud to declare that it's 'none of the government's business', even to protect the IPR of engineers, although they're responsible for the (patent) laws that don't work. Ask Sir James Dyson - what's the value of the IP that we fail to exploit and/or give to competitors by default? (Don't ask Lord Drayson or David Willetts - they don't care.)

Here we go again - having lost control of our nuclear industry and many other key areas, we are rendered impotent, totally reliant on foreign investment (often, foreign know-how too). Even if we try to promote innovative solutions, the decisions on the future direction of essential industries, like electricity, are taken out of our hands. (in theory the 'market' decides, LOL - we all know that's a bankrupt idea.)

But the ideologues can't invent a pretence that the 'market' will 'drive' a good solution for railway infrastructure. I think it's fair to say, the economy will do ok without HS2. Will it thrive on (expensive and inflexible) nuclear power and an industry of decommissioning? This is Alice in Blunderland stuff. Like I said - you couldn't make it up.

". . a significant baseload generation . . nuclear power is the obvious choice." It may be obvious to some, but we could get better 'baseload' from tidal, with energy storage.

Divert the billions from the shelved Argyle and Atlantic Arrays and invest it in ground-breaking British-owned manufacturing, that INTEGRATES wind and wave and tidal lagoons/barrages, so they all SHARE before-generator energy storage. That is far better than nuclear - the infrastructure will still be working in the next century (delivering dispatchable, renewable electricity at £45/MWh?), rather than being decommissioned in this.

Our government is desperate to maintain monopolies in areas where outside competence would bring value and discharges all responsibility in areas where heavy involvement would bring rewards.

I tell you, British short-termism has systematically undermined the British state ever since popular elections were introduced which forced the government of the day into 4 and 5 year periods of reflection with power and influence to be bought by manifestos that were little more than bribes targeted at particular demographics.

This will only get worse as political science develops and the population fragments into ever smaller interest groups, until eventually was have legislationby inducement and executive by focus group.